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In current economic analysis, inflation is largely in the eye of
the beholder, and depending on how you choose to look, very
different stories emerge. In the U.S., food and beverages count
for just 16.4% of the CPI calculation. The Chinese apparently
believe that the basic necessities of life should count for more,
assigning a 33% weight to the nutritional components. These
differences in measurement are partially responsible for the
divergent inflation climate in both countries, and make most
people believe that inflation is fickle and localized. From my
perspective, inflation is a global wave that will ultimately
swamp all shores.

As the world’s economic leaders gather in Davos Switzerland, much
of the discussion has been focused on a report jointly issued by the Global Economic Forum
and McKinsey & Co. which forecasts a $100 trillion
increase in global debt in the coming decade. The authors of the
report argue that such an increase will be needed to maintain
global economic health. Strangely, while acknowledging how the
massive increase in credit caused the
global financial crisis of 2008, the report’s authors admit no
fear of even greater leverage today. They conclude: "Credit is
the lifeblood of the economy, and much more of it will be needed
to sustain the recovery and enable the developing world to
achieve its growth potential."

But the global credit stock has already doubled from $57 trillion
in 2000 to $109 trillion in 2009, with disastrous
consequences. The WEF report wouldn’t be so alarming if it wasn’t
emanating from a gathering of global central bankers, business
leaders and politicians. These are, unfortunately, the folks with
all the power to turn these ideas into reality.

In his State of the Union address, President Obama kept pace with
the madness in Davos by vowing to “slash” government debt by just
$400 billion in 10 years. However, almost simultaneously the
Congressional Budget Office upped its 2011 deficit projection to
$1.48 trillion, which is over $400 billion more than it
previously forecasted -- effectively wiping Obama’s cuts before
they are even formally proposed.

The myopia extends into the legislative branch. In a recent
appearance on NBC’s Meet the Press, Senator Harry Reid said,
“When we start talking about the debt, the first thing people do
is run to Social Security. But Social Security is fully funded
for the next 40 years.” Apparently the Senator pays no attention
to the non-partisan CBO either. Last week the office states that
Social Security will run permanent deficits beginning this year,
5 years sooner than expected. If we aren’t going to be honest
about the insolvency of Social Security and Medicare, how can
they possibly be fixed, and how can the costs ever be contained?
The unfortunate truth here, once again, leads to the conclusion
that financing our nation’s entitlement programs will be done
courtesy of the Federal Reserve.

The CBO also said that the government will run up an additional
$12 trillion in debt over the next decade if current taxing and
spending policies remain in effect. Their report contained this
foreboding comment: “…a growing level of federal debt would also
increase the probability of a sudden fiscal crisis, during which
investors would lose confidence in the government’s ability to
manage its budget, and the government would thereby lose its
ability to borrow at affordable rates.” The fact that our elected
leaders fail to understand basic economics, or simply bury their
heads in the sand, underscores why inflation will be a major
factor in the years ahead.

For me, there is no escaping the conclusion that inflation will
continue to surge. Inflation is, after all, the increase in money
supply. And there appears to be no escaping the likelihood of
massive floods of new money rolling off presses around the world,
especially in Washington. But to a degree that is virtually
ignored by many economists, a currency’s purchasing power is not
only affected by money supply growth but also from the mere
perception of it. Just like Enron shares became worthless
overnight, if the U.S. is deemed to be insolvent because it
cannot pay back its debt, the currency could plummet in a very
short period of time, even if that pending supply of dollars has
yet to be printed.

When you understand these basic issues, the decision to include
precious metals, and other stores of value, in investment
portfolios becomes a foregone conclusion.

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